Far reaching effects

Adrian Shandley looks at the options available to clients building a retirement portfolio

Trying to see the proverbial 'wood for the trees' in the middle of a crisis is always difficult. The most recent stock market falls have had a far reaching effect on investments generally and they have decimated even the best of performance assumptions.

It is easy to think that the markets will recover, as they always have done, and that this is just another 'crash' similar to all those that have gone before. But it isn't, this time it is different, and the main difference with this particular economic crisis is the fact that it has hit all asset classes with devastating effect.

The traditional oscillating graph of interest rates versus GDP made it historically easy to identify which asset classes were set to out-perform. From a client asset allocation perspective, this was always a help when deciding on portfolio weightings.

But for some time before 2008, all asset classes had come into line, not just the main asset classes such as property, equities, fixed interest etc., but even the alternative asset classes like commodities or natural resources. This made the falls all the more severe when they occurred.

Fearing risk

So from the view point of a client, nothing looks good right now, and investors are naturally nervous about committing to anything that involves risk. Clients have always feared risk far more than they have pursued gain and this makes the job of the retirement planner very difficult.

Historically, if you just were not sure what to do, you could always move your clients to cash, but with interest rates as they are, cash isn't an option because in many circumstances it doesn't even cover the ongoing wrapper charges.

The lasting legacy of 2008/2009 will probably be severe risk aversion on behalf of clients, and perhaps rightly so, and although this will fade with time we have to deal with clients' concerns, especially as they get close to retirement.

Clients will seek some sort of guarantee or 'floor', and although it is incumbent upon us to dissuade them from these types of investments, I have no doubt that the sales of structured products will now soar as a result.

So where do we go? There is a degree of back to basics required although traditional portfolio construction now becomes more difficult in such a low income world. I have always worked on the basis that income is the key to any retirement planning portfolio, whether it be derived from equities, cash, fixed interest or property, but the stark reality now is that income isn't there at the moment.

While there is nothing wrong with the growth focused portfolio, it is not exactly the traditional model for investors close to retirement and yet with the fall of income across all asset classes, growth seems to be the main game in town right now.

Approaching retirement, it was historically accepted practice to dramatically increase the client's holding of bonds and fixed interest, but now the potential risks of the bond market are simply not understood by clients, especially long dated bonds. For the risk averse client, short dated bond stock probably has a big role to play in portfolios, provided the bonds themselves are quality, although it has to be said returns will only be modest.

Given the UK's current level of debt, it would probably be a good idea to try and increase the foreign equity component of a portfolio at the expense of the domestic equity holding, but current exchange rates make this a risky move too!

Equity holdings

People in retirement are living longer, of that there is no doubt, and so the time horizon for retirement funds has increased over the last few decades. This would normally hint at an increased willingness to hold an increased proportion of equities for longer in retirement, but again recent events have dampened down risk appetite.

It really is one of the most difficult times to be looking at asset allocation for clients close to retirement, and I think the key issue is really where they have been before. For clients coming to the market now, there are huge opportunities going forward, especially over three to five years. I do not think that any asset allocation model will fail over the next three to five years, if we are in fact coming from the low point in the markets.

However, for the client who has been invested over the last few years, the choices and decisions are all the more difficult. In my opinion, it is a case of staying with traditional models, accepting the fact that retirement funds will inevitably have fallen dramatically over the last twelve months, but despite recent falls, now is not the time to pull out and start to reallocate to more cautious models. We are where we are, and if the client has ridden the rollercoaster downwards, I think we would be negligent if we advised them to get off or move sideways into vehicles such as structured products.

Of two things there are now no doubt, firstly, the job of asset allocation has probably never been harder, and the decisions have never been more critical. Secondly, clients have never needed quality advice more than they do now.